Know Your Industry’s Beta

by Craig Anthony

1 min read

If you own and operate a small business, you are, by definition, part of an industry. A useful statistic to be aware of is your industry’s beta. Beta is a measure of an asset’s risk in relation to a specified stock market index. For example, one of the world’s most watched stock market indices is the Standard and Poor’s (S&P) 500. If your industry has a beta of 1.5 versus the S&P 500, that means, roughly, that your industry is 1.5 times more risky than the S&P 500. Thus, if the index returns 10% one month, your industry will likely return 15%. Likewise, if your industry has a beta of 0.2, it is only 20% as risky as the index. Thus, if the index loses 10%, your industry only loses about 2%. This is a good measure as it can help a business owner with financial planning, risk management, and sales projections. Low beta industries tend to be more stable and predictable, while higher beta industries are more uncertain. The statistic is calculated as: Beta = Covariance(Industry Returns and Market Index Returns) / Variance of Market Index ReturnsSince the beta of a small business cannot directly be calculated, a good idea is to find a proxy mutual fund or exchange-traded fund and use the daily price changes versus the market index of your choice to calculate the value.

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